Meta Platforms (NASDAQ: META) has been a big winner over the past year and a half, but the stock has slipped following its recent earnings report in April.
Although the social media titan beat analyst estimates on the top and bottom lines, investors didn't like its plans to increase capital spending and operating expenses in order to invest in artificial intelligence (AI) and other strategic initiatives. Its second-quarter revenue guidance was also a bit lighter than expected, leading to a nearly 11% slide on the report.
Now, one Wall Street analyst thinks Meta's a sell.
Image source: Getty Images.
Exane BNP Paribas says to avoid Meta
Last week, Exane BNP Paribas initiated coverage on Meta Platforms with an underperform rating and a price target of $360, implying a downside of 24% from Wednesday's prices.
Analyst Stefan Slowinski called an increase in AI spending with a new revenue stream to complement, and he said other "Magnificent Seven" stocks are better prepared to monetize generative AI technology.
Is this metaverse round 2?
Like other big tech companies such as Alphabet, Meta has a highly profitable core advertising business from its social media platform, which allows it to invest in more experimental businesses like the metaverse and now AI.
However, the metaverse has been a massive drain on profits thus far, as Meta reported an operating loss of nearly $4 billion in the first quarter. While its social media business is strong enough to carry that, focusing too much on a technology it can't fully monetize is a legitimate concern for investors.
If Meta's stock is trading at $360 a year from now, and the company delivers the $20.75 per share analysts currently expect (according to S&P Global Market Intelligence), that would be a price-to-earnings ratio of 17.3 -- lower than today's multiple around 27 but still higher than the doldrums of its first year as Meta.
If the company can maintain spending discipline, its stock should be a winner, but investors are loath to see another episode of the metaverse money pit.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in Meta Platforms. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
